Should China Be Ejected from the SDR?

China’s decision to tighten its grip on the renminbi's exchange rate indicates that it has no intention of playing by the rules of the game. Indeed, if the Chinese government were serious about opening its capital market, it would have to implement reforms that would threaten its model of political and economic management.

SANTA BARBARA – Last week, the Chinese government tightened its grip on the renminbi’s exchange rate. China has now effectively reneged on a promise it made 18 months ago, when it lobbied its way into the basket of currencies that determines the value of the International Monetary Fund’s synthetic reserve asset, the Special Drawing Right (SDR).

China’s latest move will hardly strengthen confidence in its currency. As some of us warned at the time, the renminbi’s admission to the SDR basket was a highly political decision that could have adverse long-term consequences. The basket had previously comprised the US dollar, the euro, the British pound, and the Japanese yen – all world-class currencies that meet the IMF’s two criteria for admission: they are issued by the world’s leading exporters, and they are “freely usable,” meaning that they are widely exchanged worldwide.

By contrast, the renminbi met only the first criterion when it was included in the SDR. Although China was already the world’s largest exporting country, its financial markets were primitive, and its currency plainly fell far short of being freely usable. In 2015, the renminbi ranked seventh in global central-bank reserves, eighth in international bond issuance, and 11th in global currency trading; and it remained non-convertible for most capital-account transactions.

I think politically motivated decisions will have adverse effects on the economic structure of institutions like IMF. As 2nd criterion was arbitrarily overlooked and China reneged from its promise of liberalizing renminbi then tomorrow we will have the very pillars of SDR shattered in the hands on political mismanagement of liberal economic structure. And, that will make IMF a mere shadow of what it is today.

I know Prof. Cohen is talking about the renminbi and the SDR and I know we should not go out of the topic.
But "Capital controls can be useful (Mr. Friesen below)." Regulation is not always wrong and deregulation is not always good. Different economic interests want regulation or deregulation depending on which one is fit to promote each interest.

Easy answer. No. China was not admitted to the SDR because it satisfied the standard criteria for joining the SDR. Why should it be expelled for failing to meet those critieria? Obviously the traditional standards are null and void, at least for China.

The CCP wants to avoid at all costs implementing "reforms that go straight to the heart of the Chinese Communist party's model of political and ecnomomic management." Openess such as is tolerated in the West could seriously erode the CCP's authority and lead to social disintegration as happened many times in Chinese history. No Chinese want it to happen unless they have already carried out whatever wealth they can to the West or Japan.
Leave the renminbi as it is in the basket of the SDR and Mr. Xi Jinping will remain happy to think that it is one of the world's key currencies.

I suspect what it actually comes down to is that China is included (warts and all) in the global currency basket or we face the prospect of the global financial system splitting into two. Such a schism may be inevitable. I doubt it would end well.

The Chinese economy is too big to be told to stand in the corner and face the wall. That the US seems to be deciding to do that of its own volition is cause for concern.

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